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When to Sell a Fund

"My fund has gone up by 25 per cent. So, I think it is time to book profits and move to some other fund." This is how many fund investors decide to sell a fund. But this is a mistake

“My fund has gone up by 25 per cent. So, I think it is time to book profits and move to some other fund.” This is how many fund investors decide to sell a fund.

But this is a mistake. You, as a mutual fund investor, do not have to work hard in actively taking buy and sell decisions and keep moving your money from one to another. Investing in a mutual fund is very different from investing in a stock where you may have valid concerns after a stock has gone up substantially. But this is not so for mutual funds. All you need to do is to choose a few good and established funds and keep investing regularly.

Having said that, there are some cases which may call for a sell decision. Here are the situations in which you should consider exiting your fund.

Rebalancing
You may start investing with a long-term horizon, and therefore decide to put all your money in equity funds. But in due course of time, you may need to change that. You may need to rebalance your portfolio when your present asset allocation, i.e., the distribution of investments between equity and debt, is no longer suitable for you. It may be because of the fact that you can not afford to lose your money in the near future. This could be because of various reasons. For instance, you foresee some expenditure in the near future and you want that much of money to be absolutely safe. If that is the case, you should start shifting a part of your portfolio towards safer funds, like the balanced funds or MIPs so that if the markets fall right before the time you plan to redeem your money, it should not have a great impact on your portfolio and you are not forced to part with your gains.

Therefore, exiting a portion of your equity fund investments to shift to safer balanced/debt funds would be a plausible reason to sell.

Underperformance
Investing in a fund is about making a choice from the various alternatives. And while you should not run after the hottest performers of a particular time period, your objective should be to invest in funds which have delivered good returns consistently vis-a-vis their peers over a number of years. But it may so happen that subsequently your fund becomes a laggard and you may have to sell it and look for better options.

But while doing so, don't just jump into action at the drop of a hat. Under-performance over short periods of time, even a year is quite acceptable. But only if your fund consistently under-performs should you take a decision. Secondly, also try to analyze the reason for under-performance. It may be the case that a particular style of investing is not performing because of which your fund has lagged. For example, in the last three years, mid-caps have been the flavour of Indian equities and because of that, a large-cap fund would have lagged others. But that should not mean that you exit large-cap funds altogether.

Crucial Changes in Your Fund
Many events can occur which make the fund unsuitable for you and hence call for a sell decision. There may be a change in fund objective. For example, after the tech debacle of 2000, many of the technology funds changed their objective to become more like a diversified equity fund. Now any investor who would have invested in such a tech fund purely to speculate upon the technology sector should have exited the fund after the objective change.

Similarly, if a star fund manager leaves, then investors should pay close attention to the fund's performance for the next few months and also see whether the new fund manager has significantly changed the style and strategy of the fund. If such things become visible, then you can consider selling the fund.